Spring Budget 2023 and R&D Tax Credits - A partial and confusing climb down

The new 27p/£1 tax credit for SMEs doesn’t fully reverse the damage caused to UK innovation from the Autumn Statement 2022.

Changes to R&D Tax Relief in the Autumn Statement 2022 really hit the technology and life sciences sectors hard. Measures announced in the Spring Budget, which allow R&D intensive SMEs to claim £27 credit for every £100 spent on R&D, represents only a partial climb down by the government.

We need to remember that the Autumn Statement in 2022 saw a blanket reduction in the SME Tax Relief Scheme. This involved the Enhancement Rate shifting from 130% to 86% from 1 April 2023 and limited the rate at which the cash credits could be generated by surrendering losses. Start-Ups with high losses were especially affected by this. A high loss-making start-up undertaking highly risky and cutting-edge technological development saw its cash credit on R&D spend go down from 33p to 19p per £1 of R&D Spend. In addition, the Autumn Statement signalled the exclusion of International Subcontracted costs, set to come into effect from 1 April 2023 as well. However, the Spring Budget 2023 announcement specified that this measure will be delayed to 1 April 2024. Whilst this is welcome news, the eventual exclusion of such costs severely limits the incentive of growth start-ups in the UK and is in contrast to the Government’s ‘Global Britain’ agenda.

There was and still is a sense of disbelief that the government continues to talk about innovation-driven growth and yet specifically discriminated against R&D intensive start-ups (particularly affecting tech). The Spring Budget does partially represent a climb down but not a complete one.

Eventually R&D intensive SMEs will be able to access a higher rate of relief, but it is not straight forward.

Too many rules

In addition, the process of claiming R&D relief has gotten very complicated (more so than usual).

The new 27p/£1 benefit rate for high loss-making R&D intensive SME’s can only be taken advantage of after the government has developed the requisite tax legislation and brings it into force. This won’t happening tomorrow, or next month or probably the month after. So, in the meantime, the Autumn 2022 changes will come into force from 1 April 2023 and under these rules the very same SME claimant would only get 19p/£1 of R&D spend rather than 27p/£1.

The government are advising such SMEs to either delay submission until the new legislation is in place or submit under the legislation coming into force from 1 April 2023, and then amend their claims later when the newer legislation is introduced.

Additional administration is also planned to support the 27p/£1 R&D intensive company rate, where HMRC may conduct additional checks. As such these claims may take longer to process. The mechanism for this is under development and is set for introduction from 1August 2023 onwards. The ‘interim’ period between 1 April 2023 and until the R&D Intensive SME Scheme is introduced will mean these companies will face economic hardship, and their plans for re-investment dependent on R&D cash credits will involve even more complexity and uncertainty.

It is also important to note that R&D intensive SMEs may not have high losses from one period to the next, as a launch and commercialisation phase may follow a development timeframe and vice-verse. Unfortunately, profit-making or companies that breakeven will not realise the 27p/£1 rate when introduced, and instead their benefit rates will go down from 25p/£1 & 19p/£1 to 21p/£1 & 9p/£1 respectively.

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